Author: John Crabb | Published: 28 Aug 2019

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A number of leading financial, legal and charitable
organisations have come together to develop a strategy that
they hope will help save the world's population of black rhinos
from complete extinction. The instrument, a take on an impact
bond, will pay investors based on indicators linked to the
achievement of a pre-defined conservation performance
– or in laymen's terms, if there are more black
rhinos.

Although still in the stage of finalising an investor pool,
the concept of the so-called rhino bond is to "mobilise new
capital for conservation and to shift funding to focus on
delivering outcomes". Likely to be in the region of $50
million, investors will be paid out if the population of black
rhinos increases in a handful of sites across South Africa and
Kenya.

According to Marisa Drew, CEO of the impact advisory and
finance department at Credit Suisse, one of the partners behind
the project, the concept of the rhino bond is rooted in the
idea that multiple actors can come together to make real change
in some of these areas that have either an environmental or
social purpose.

"Traditional models that have historically been rooted in
the NGO or non-profit community, particularly when it comes to
conservation, are facing limitations because the capital
typically follows annual fundraising cycles and is not
scalable," she said. "This form of funding is not enough on its
own and it's also recognised that the governments [of those
countries] the most rich with wildlife are the most resource
constrained, even though investment wildlife conservation would
provide disproportionate benefits to their economies."

"With all that capital and
all that good will that exists, we still have
situations like the near extinction of northern white
rhinos"

"Yet, with all that capital and all that good will that
exists, we still have situations like the near extinction of
northern white rhinos," she added.

From this issue a concept called blended finance has now
surfaced, which is the idea that if you bring multiple actors
— across the public and private sectors —
together in the same structure to attack a problem, then maybe
one plus one is a whole lot more than two. "Each brings
different skill sets to the table, and if you can collaborate
across the different benefits you bring to the table it might
be able to create a model for scalable conservation finance,"
said Drew.

A number of entities, including Credit Suisse and UBS,
Conservation Capital, Conservation Alpha, the IUCN SSC African
and Asian Rhino Specialist Groups (AfRSG and AsRSG) and the
World Wildlife Fund (WWF) are involved in the development of
this project, with law firm DLA Piper providing legal
assistance on a pro-bono basis.

Outcome based

Where it differs to other similar instruments is that the
bond is not based on output, but rather outcome. One or more
financial investors will come in up front and put the capital
forward for the project, and if the pre-determined outcomes are
achieved they will see a return. If the project fails, because
rhino numbers fall, then these investors will get zero return
and depending on how the structure ends up, may also lose their
principal. These investors will acknowledge that there is risk
to both their principal, and return, but feel sufficiently
strongly about this outcome that they are willing to put their
money where my mouth is.

There is a second set of investors that come in, known as
outcome payers, who will pay out both the principal and return
to the initial investors in the situation in which the outcome
is met. This is instead of an investor such as a charity coming
in up front, which is the usual model.

"What we do sometimes hear from certain types of donors is a
belief that there is too weak a link between their initial
investment dollars and what they are trying to solve. In many
cases, especially for larger foundations, they prefer to use
their charitable dollars to pay for outcomes" said Drew. These
charities have the capital to allocate in a charitable way, but
would really like to know that 100% of their capital is funding
success rather than just hope.

Risk

According to Tony Lopez, partner At DLA Piper, in addition to measuring the
number of rhinos in existence in the specified locations at the
end of the five year term, versus estimated rhino population
numbers without intervention, the outcomes may also be based on
other variables. "Similarly to the way that investors would
view a profit-by-profit making enterprise; instead of looking
at how many units a manufacturing company produces and profits,
this investment would view success more along the line of how
many new and better forms of caretaking have been established
and are operating well, and how many rhinos are in the world,"
he said.

"We want to create a system where the fundamental equivalent
of the profit making is a measurable conservation and social
outcome," Lopez added.

"We want to create a system
where the fundamental equivalent of the profit making
is a measurable conservation and social outcome"

"The goal in the end would be that investors who
wouldn’t necessarily be putting money towards
conservation would be putting it to a different opportunity, a
well-run conservation site will have a social and economic
ripple effect through a community," he said. Within this
framework the donor is underwriting all the interventions up
front. There will be milestones that have to be achieved to
demonstrate progress, but ultimately they are taking on all of
the underlying performance risk.

"Risk doesn't come for free, it is all about whether the
project can deliver the results, cost effectively, to the
degree that outcome payers are having to pay to be risk free
and only pay when this result is on the table," said Oliver
Withers, head of conservation finance and enterprise at the
Zoological Society of London (ZSL).

In effect, this is a private equity play, ZSL and the other
organisations involved, have constructed a portfolio of sites
and asset values, based on the fact that rhino populations are
very important to the African continent. "To make sense it has
to be more profitable for the outcome payer, more
bang-for–buck, or value for money - what we have done
is created a framework around the impact bond model that allows
us to get the impact pickup in growth rates," added
Withers.

According to Drew, the response has been extraordinary, and
the bank is working alongside a large number of organisations
to bring it all together. "First we have to get everybody to
agree on the final details of the structure, such as the
coupon, at what break point do people make a return and whether
or not there will be downside protection for investors. There
are also many other moving parts that affect the structure,
such as the potential for rhino [population] growth rates in
the various sites," she said.

"Extensive work has already gone into the mapping and
feasibility analysis, where the investment dollars will be
applied, etc., but ultimately, those putting up the capital
will have to agree that they are comfortable with the economics
and the targets."

This will be the first ever development bond tasked with
saving wildlife. In 1970 there were 65,000 black rhinos whereas
today there are 5,300. Black rhinos are on the critically
endangered list, but at the current rate of decline —
about three black rhinos are poached every day — the
animals will be extinct within a decade, or sooner.

There are similar issues facing other animals, such as
elephants, and with so much wildlife facing extinction it is
crucial that projects like this are successful. "We want to
prove this as a viable model for bringing different
stakeholders to bear; there is no reason why, if this is
successful, that it couldn’t be scaled or
replicated to protect different animals at risk from human
activities" said Drew.

This bond is something of a first step, and the aspects of
it that work will be taken and hopefully replicated and built
upon further.